They think it's all over - is it?

They think it's all over. The capitalist media is saying that the world capitalist economy, led by the US is recovering fast. Indeed, they say, there was no economic recession or downturn at all - or if there was, it was hardly noticeable. Michael Roberts investigates the truth of this idea.

They think it's all over. The world capitalist economy, led by the US is
recovering fast. Indeed, there was no economic recession or downturn at all. Or
if there was, it was hardly noticeable. That's the story coming out of the
business pages of the newspapers, from the TV pundits on the CNBC business
channel and from all the capitalist experts.

From all appearances, things could scarcely be better for the US economy. It
has put the recession behind it with so little attendant suffering that most
people never even noticed. And now the way is clear for another upswing of
growth. So are those few of us who think it's not all over clearly biased Marxists
hoping in vain for the "collapse of capitalism", or just plain wrong?
It looks as though we are.

As the financial year ending March came to an end as Easter began, the US
statisticians revised their estimate of US economic growth for the period from
October to December 2001 yet again. Despite the disaster of the terrorist attack
on the Twin Towers on 9/11, despite the biggest corporate collapse in American
financial history in Enron, despite the war in the Middle East and Afghanistan,
the US economy increased in size by 0.4% (or 1.7% on annual basis). And last
week, it was announced that in March confidence about the economy among American
households took the biggest jump up in ten years. Yes, they think it's all over.

Indeed, throughout the "recession" of last year, consumers
continued to spend like there was no tomorrow. "Never before have consumers
spent with such abandon during a recession," comments Stephen Roach, chief
economist at Morgan Stanley. "In the 28 quarters of the past six
recessions, consumer demand rose, on average, at just a 0.5% annual rate. In the
4th quarter of 2001, consumption spending rocketed at a 6% annual rate."

Even the unemployment picture is hardly one to associate with real recession.
Factory workers were laid off in respectable numbers, but the number of
managerial workers actually grew. Stephen Roach reports that "managerial
bloat" increased 2.9% last year. One out of every three employees hired in
the last three years is a "manager", increasing the managerial class
to 15.3% of the workforce.

At the same time, productivity continued to rise at above 5% a year, when
normally it goes down in a recession because workers cannot be cut as fast as
sales fall off. But rising productivity is just one of the very peculiar
features of what must be not merely the mildest, but the strangest, recession
ever. As recessions go, the most recent one is remarkable not for the pain that
it inflicted, but for the pain it didn't.

And last month, the final seal of approval for the end of the recession came
from the US Federal Reserve Bank Chairman, Alan Greenspan, the guru of the
America's capitalist New Economy. But the great man sounded a note of caution
about the future. "Although household spending should continue to trend
up," said the Fed chairman, "the potential for significant
acceleration in activity in this sector is likely to be more limited than in
past cycles. The recovery in spending on business fixed investment is likely to
be only gradual. In particular, its growth will doubtless be less frenetic than
in 1999 and early 2000.

So the recovery may be modest. Or, it may not happen at all! And everybody
should remember the experiences of previous capitalist recessions since 1945.
It's quite common that after an initial contraction in GDP, a recovery follows
for a quarter or two before the economy slumps once again. Indeed, in every
previous downturn, economists, investors, and especially politicians remained
very optimistic. They all continued to forecast an imminent economic recovery in
the 1957, 1960, 1969-1970, 1973-1974, and 1980-1982 recessions. But in all these
recessions GDP contracted, then expanded after the initial phase of contraction,
but again fell thereafter.

And this time, the conditions for recovery are even more absent. In the
fourth quarter of last year, profits fell another 8% and profit margins (the
difference between the costs of production for each unit and the sale price) are
at their lowest levels since the Depression of the 1930s. And that's key.
Without profits, there will be no investment and no recovery.

Businesses make profits by selling products and services for more than they
cost to produce. An individual business can increase profits by cutting costs.
But one business' costs are another's revenue. So cutting costs does nothing for
the economy as a whole. The way an economy increases its profits is by selling
more or by raising productivity.

Productivity growth is the great hope of Alan Greenspan and bullish
economists to create profits. "The synergies of key technologies markedly
elevated prospective rates of return on high-tech investment, led to a surge in
business capital spending and significantly increased the growth rate of
structural productivity," said the Fed chairman last summer, explaining why
stock prices were so high.

With Greenspan's remarkable new productivity, one might have expected
business profits to soar. Greenspan said they would. Everybody thought they
would. And stocks were priced as if they would. Instead, corporate profits have
collapsed. Profits were supposed to increase, thanks to the enlightened new
management practices of US corporations and the new, productivity-enhancing
information technology.

But the influence of these two major changes in the US economy was grossly
misjudged. Instead of improving profits, they demolished them. Why? It's because
rising productivity did not go into profits but into intense competition. One
man's profits became another's losses. Huge investment in new technology was
accompanied by no rise in prices. Profits disappeared with inflation. US prices
are now hardly rising. In the last three months, the rise has been just 0.1%!
The same phenomenon has been repeated across the globe in the major capitalist
economies. So corporate profits worldwide have fallen for five quarters in a
row, the largest drop in three decades.

And without profits, there will be no investment. Almost the entire recent
rise in GDP is from rebuilding stocks. But this is a short-term phenomenon.
Unless consumer spending and business capital spending takes off, demand for new
production will sag. With consumers already spending as though we were at the
top of a boom, and more deeply in debt than ever before, capitalists can hardly
expect Americans to do more spending. And capital spending shows no sign of the
real level of growth necessary to jump-start the economy.

As mentioned above, management payrolls have actually increased during the
"recession". So has corporate borrowing, reaching a record of $4.93
trillion by the end of September 2001. The cost of carrying this debt is a big
burden and it is growing. Although wholesale prices (prices at the factory gate)
are falling at an annual rate of 2.6%, average real interest rates are over 10%,
one of the most painful rates for debt service in our history.

US corporations are building up debt. From 1995-2000 US business net fixed
capital investment edged up $321 billion but indebtedness ballooned by $2,472
billion. For each dollar added to net new fixed investment, there were 7.7
dollars added to indebtedness. By this stage of the recession, the corporate
sector has normally cleaned up its deficit spending and is well into saving for
investment - but not this time around.

So we may go from the recession that never was, to the recovery that never
came. They think it's all over, but Kenneth Wolstenholme is no longer here to
say: "it is now!"